Is Tax Fraud Likely to Be Disclosed During Divorce Proceedings?

Many soon-to-be former spouses may have an inkling of an idea that things can go seriously wrong during divorce negotiations if the process is not handled strategically and professionally. However, most people probably focus on reaching a poor settlement rather than potential criminal exposure due to allegations by the other spouse. Unfortunately, and despite certain ethical problems with doing so, the threat of exposing tax fraud, tax evasion, or other tax crimes is often used as a cudgel to secure a more favorable divorce settlement. The reasons as to why a divorcing spouse can be motivated to disclose past tax fraud and crimes are numerous and often synergistic in nature.

What Are Commonly Threatened Tax Crime Disclosures During a Divorce?

While a divorcing spouse can threaten to expose nearly any tax crime during divorce proceedings, there are certain crimes that are more likely to be disclosed than others. For instance, acts that are commonly cited when threatening disclosure include making false statements to IRS agents, making false or inaccurate tax return filings, hiding income in offshore accounts, fabricating deductions and expenses, and failing to report foreign bank accounts. These acts can theoretically lead to charges of tax evasion, the submission of false documents, conspiracy to commit tax fraud (often between the husband and wife), failure to file tax returns, money laundering, and FBAR and FATCA-related charges.

Why do Divorcing Spouses Expose Tax Fraud?

To start, there is certainly often an emotional element to any decision to turn in a former husband or wife for tax crimes. The divorcing spouse may feel hurt or betrayed and be seeking a means to take revenge. However, while the role emotion plays cannot be understated, it is important to focus on the many other factors that may motivate and individual to expose tax crimes as part of a divorce proceeding.

Also consider the fact that, regardless of whether the state follows a community property or an equitable distribution regime, the divorce will entail the division of marital property and assets. The divorcing spouse may come to believe that exposing this fraud is essential to proving that their former husband or wife is hiding significant assets that should be divided among the parties. The spouse may believe that a favorable settlement cannot be reached without disclosing these assets.

Finally, there is often some element of seeking to ingratiate oneself to the court while making the opposing party appear untrustworthy. This may occur in the form of disclosing the tax fraud to the court directly. It may also occur through blackmail where the divorcing spouse threatens to disclose the alleged impropriety to the court unless a more favorable agreement can be reached.

Why a Divorcing Spouse May Want to Reconsider Before Becoming an IRS Informant

Thus, there are a number of motivating factors behind divorce-motivated disclosures. However, a strategy of this type can be extremely risky. Furthermore, it likely raises ethical issues for CPAs and family law and tax attorneys who may represent a party that wishes to use tax fraud allegations offensively.

To start, actually making the disclosure that your former spouse engaged in tax fraud can theoretically open the door to the depletion of marital assets. In some cases, the marital assets could be completely exhausted. This can occur through two mechanisms. First, the marital assets may be seized by the IRS or otherwise forfeited by the taxpayer. Second, the criminal allegations may lead to the loss of a job / career and can semi-permanently disrupt the income stream should the accused spouse be incarcerated.

Furthermore, the disclosing spouse may implicate him or herself in the alleged tax crimes. This risk is the greatest when it is clear that the disclosing spouse had knowledge of the scheme or transactions. In the worst-case scenario, the disclosing spouse may face the same tax charges the spouse faces. In other scenarios, the disclosing spouse may not face criminal exposure, but he or she may nevertheless be liable for fines, penalties, and restitution resulting from the fraud.

In other words, threatening a disclosure of alleged criminal tax behavior is a high-risk strategy. In any case, it is important to recognize that this tactic may arise during a divorce. Thus, it is important to work with a criminal tax defense attorney who can identify this risk early and prepare diligently to minimize its impact.

Is Tax Fraud Likely to Be Disclosed During Divorce Proceedings? was last modified: April 16th, 2019 by David Klasing

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